(Opinion-Editorial) Online Sales Tax Bill Will Only Hurt Bloggers (Minnesota S.F. 458)

The Minnesota "Amazon Tax" Bill S.F. 458

The Minnesota Legislature is considering passing a law which would require online companies to collect Minnesota sales tax if people in the state participate in the companies' affiliate marketing programs (Senate File No. 458). The law seems largely directed at the mega-online-retailer Amazon.com.

Unfortunately, the legislation fails to understand reality and won't result in one dime of sales tax being collected from Amazon. In 1992, the Supreme Court held (Quill Corp. v. North Dakota) that businesses must only collect sales tax where they have a "physical" presence. This "physical presence" is called a "nexus." Commissioned salespeople employed by a company in a state, usually selling to people in that state, are, understandably, considered to meet this criteria.

S.F. No. 458 seeks to redefine "nexus." The law reads: "A retailer is presumed to have a solicitor in this state if it enters into an agreement with a resident under which the resident, for a commission or other consideration, directly or indirectly refers potential customers, whether by a link on an Internet Web site, or otherwise, to the seller."

This law would affect online bloggers who participate in "affiliate marketing programs." Amazon's affiliate marketing program is called the Amazon Associates Program. Individuals who have websites or blogs can link to products on Amazon. If somebody visiting the blog clicks on the link, goes to Amazon, and purchases the product, the blogger receives a small commission. This is online advertising where the website is only paid if a product sells. And, the website has the option of only linking to products it likes.

Suppose a Minnesota blogger has a website devoted to teaching people foreign languages. The website is hosted by a company in Utah. To help offset the costs of operating the website, the blogger links to some recommended language books at Amazon. If a visitor to the website follows a link to Amazon and purchases, oh, say, The New Penguin Russian Course for $12, the blogger might earn $0.50.

So, according to the proposed legislation, somebody visiting this website from Colorado and having the web pages fed to them from web servers in Utah, who then purchases a book from Seattle-based Amazon somehow creates a "nexus" or a physical presence of Amazon in Minnesota.

I guess in a virtual or legislative world that could make sense. But, in the real world, it makes me wonder what's next. Cyberspace property taxes?

Because of the existence of bloggers who participate in Amazon Associates, the new law would require Amazon to collect sales tax for all taxable sales made to all Minnesota residents.

The problem is, if passed, Amazon will simply cease having Amazon Associates in Minnesota. Minnesota Associates are relatively unimportant to Amazon. With no Minnesota Associates, Amazon will nullify the effect of the law. Amazon will continue not to collect sales tax. Because of this, the law will be totally ineffectual in raising state tax revenue.

As an end result, Minnesota bloggers will be harmed without any tax benefit to the state. In addition, small retailers in the state also will receive no benefit from the bill's passage. Because Amazon will continue to sell without collecting sales tax, small retailers will be at exactly the same competitive disadvantage as they were before passage of the bill.

New York's "Amazon" Tax: A Test Balloon

What's happened in other states which have passed similar legislation? In one state, New York, the home to many substantial publishing companies, whose links are vastly more important to Amazon, Amazon is presently collecting sales tax, but Amazon is also challenging the New York law in the Courts. If Amazon loses in the Courts, it might well still terminate its New York Associates. Then, Amazon will again cease collecting New York sales tax.

New York is a special case for Amazon, because it's where Amazon is challenging the constitutionality of states' "Amazon tax" laws which attempt to redefine "nexus" based upon the existence of Amazon Associates in the state. (The expression "Amazon Tax" is something of a misnomer, because what these laws require is that Amazon collect and remit sales tax on behalf of customers in a state. By "Amazon Tax" we mean tax legislation aimed at requiring online retailers to collect state sales tax even if the companies don't have employees and business operations in the state.) Issues of interstate commerce, and what, exactly, constitutes a reasonable definition of "nexus" are at the core of this litigation.

What constitutes a reasonable definition of "nexus" or physical presence? States can pass any law they like, but if the Courts find the law to be unconstitutional, the law is invalidated.

For example, a state could pass a law that says a business has a physical presence in the state because at some time in the past the company's CEO visited the state during a vacation. This law would almost certainly be held to be unconstitutional, according to the Supreme Court Quill Decision.

The Supreme Court wrote that The Commerce Clause: "…prohibit(s) taxes that pass an unfair share of the tax burden onto interstate commerce. [and] … require(s) a substantial nexus and a relationship between the tax and State provided services, limit(s) the reach of State taxing authority so as to ensure that State taxation does not unduly burden interstate commerce."

The Supreme Court decided that advertising to residents of a state didn't create a "substantial nexus." Mailing physical catalogs to customers didn't create a nexus. If sending physical catalogs to customers in a state and advertising doesn't create a nexus, it hardly seems that a link on a web page does.

Many Amazon Associates feel that just because Amazon advertises on their websites that this doesn't create a legitimate physical presence of Amazon in the state. They feel the states are simply using the existence of Associates in a state as a way to circumvent the 1992 Supreme Court Quill decision. As such, they feel these state laws are unconstitutional.

These are the sorts of legal issues the Court will be mulling over in New York.

In New York, other online companies with successful affiliate marketing programs, for example, overstock.com, terminated their relationships with New York affiliates. These companies aren't collecting New York sales tax for their online sales.

When Amazon began collecting sales tax in New York, taxing authorities in other states began drooling. Might this not be an easy source of extra state tax revenue? What these other states overlooked is that New York represents a test balloon of sorts for Amazon. Having affiliates in New York and collecting taxes there clearly gives Amazon legal standing to challenge New York's "Amazon tax" law as unconstitutional. In other states, Amazon wouldn't simply roll over and begin collecting sales taxes.

The Amazon Tax Experience In Other States

In Hawaii, North Carolina, Colorado, Rhode Island, and, most recently, Illinois, Amazon ended its relationship with Associates in those states when the states tried to redefine "nexus" as including blogger websites that link to Amazon. Minnesota is much more like Colorado and Illinois than New York in this comparison. Because Amazon ended its relationship with Associates in those states, Amazon doesn't collect sales tax in any of those states. These new laws will collect no new revenue from Amazon in those states.

According to Paul L. Dion from Rhode Island's Department of Revenue, six months after the legislation passed in Rhode Island, no sales tax revenue has been collected as the result of the new law.

What this law does do is harm Minnesota bloggers. A very successful blogger who earns substantial income via affiliate marketing links might need to consider relocating to another state, because the best affiliate marketing programs will no longer be available in Minnesota. Most bloggers will simply lose income.

After online tax legislation redefining nexus was signed into law in Illinois, the successful bargain hunting website FatWallet.com, with 54 employees and $15 million in revenue, packed up, left Illinois, and moved to Wisconsin. The company would have lost over 30% of its website revenue without access to Amazon Associates and other popular affiliate advertisers.

Providence (Rhode Island) Business News reported that Lydia Walshin, the founder of the cooking blog, ThePerfectPantry.com, moved her company to Massachusetts because of Amazon tax legislation in Rhode Island. The profitability of her blog depended upon Associate links to Amazon.

An Attempt To Pinch Affiliates?

The new law is supported by a coalition of large corporations which do have a substantial physical presence in most states, because they have large retail stores in those states. Wal-Mart is a major lobbyist for this legislation. Wal-Mart, Best Buy, Barnes & Noble, and other major retailers have been soliciting exiled Amazon Associates and encouraging them to join their affiliate programs.

Unfortunately, many bloggers feel these companies don't have desirable affiliate programs: They don't have the wide selection of products Amazon has, nor do they have terms as favorable as Amazon's Associates. These larger retail stores don't have the online branding that Amazon has. Because Wal-Mart and these other corporations can't compete with Amazon in getting people to join their affiliate programs, it seems they have sought to legislate little blogging Amazon Associates out of existence.

Just as Arkansas passed Amazon tax legislation and overstock.com announced it was terminating its affiliate advertising on Arkansas websites, Wal-Mart jumped in to pinch ex-overstock affiliates writing, "Walmart will not turn its back on Arkansas internet businesses owners who have been put in jeopardy by an online-only retailer. Instead, we encourage them to join Walmart.com’s Affiliate Network. We applaud the Arkansas legislature. …"

On its website, "Stand With Main Street" [A group promoting online sales tax that is backed by Wal-Mart. More about this later.] offers: "About to get thrown under the bus?" [by Amazon dumping you as an affiliate]. ...If so, we have a network that connects affiliates with retailers across the nation. To learn more sign up below. ..."

These huge Wall Street corporations want to deny Minnesota bloggers access to the Amazon Associates Program. Then, they want to pretend to be some sort of savior, offering exiled affiliates their own affiliate marketing programs to join.

Should Mom-And-Pop Retailers Support S.F. 458?

No. The best reason not to support S.F. 458 has already been stated. The bill won't work. It will only lead to Amazon terminating Associates, which satisfies a strategic goal of the larger brick-and-mortar retail chains. Because Amazon will continue to sell without collecting sales tax, small retailers will be at exactly the same competitive disadvantage as they were before passage of the bill.

Smaller retailers might even find themselves at a greater price disadvantage as these larger companies shed the costs of affiliate marketing. Overstock.com has announced that in some states where it will no longer offer affiliate marketing, it will offer customers a cash-back rewards program. In other words, it will further lower prices. This is actually good news for consumers. I suspect Amazon might shift the money to TV advertising or to online ads that aren't subject to "affiliate" legislation.

What's Up With The Prop?

Because of the existence of the Internet, we can see our legislators in action discussing issues we care about. As the tax committee discussed S.F. No. 458, it was reassuring to see the Tax Committee Chair, Senator Julianne Ortman (a sponsor of S.F. 458) seemed open-minded about the pros and cons of this legislation.

But, when Senator Ann Rest held up a book as a prop and said she sells on Amazon; is [therefore] an Amazon affiliate; and that she supports the bill, it made me wonder: Do these legislators even understand what is meant by the term "Affiliate"?

Amazon affiliates, a.k.a. Amazon Associates, don't sell on Amazon. (Some might, of course. Anybody can sell used books on Amazon, but this is something totally different from being an Amazon affiliate.) Amazon Associates, the ones being affected by this legislation, don't physically sell products on Amazon. They do not physically handle products. They merely have websites which link to Amazon. They wouldn't have any packages to hold up. So, what's up with the prop?

To the best of my knowledge, Senator Rest is not an Amazon affiliate (a.k.a, an Amazon Associate), and should not claim to speak for true Amazon affiliates. Being a customer of Amazon doesn't make you an affiliate. Selling a few used books on Amazon also doesn't make you an affiliate, at least not in the context of this proposed legislation. In fairness to Senator Rest, legislators must deal with a myriad of complex issues and can't be expected to be experts in all areas. Senator Rest is one of the sponsors of S.F. No. 458.

It's somewhat unnerving to think the people passing laws that can destroy small businesses might not only be unaware of the effects the laws will have, but might fail to comprehend the basic nature of exactly what is being legislated.

Watching discussion of this bill was like watching a chess player pondering a really bad queen move. He says he'll move his queen to this square and, then, on his next move, Checkmate! His queen will checkmate the opponent. But, looking at the board, it's obvious that, no, checkmate won't follow. The opponent will simply capture the queen with a rook. This legislation ignores, or fails to understand, the reality of how Amazon and other affiliate marketers will respond to the legislation.

While some legislators supporting this law are probably just ignorant of how the law will play out in reality, some politicians supporting this bill are probably showing their support for a powerful special interest lobby (Big Box retail). These lawmakers are willing to vote for ineffectual legislation disguised as helping small retailers.

Senator Greg Brophy [an opponent of Amazon tax legislation] explained another reason why some legislators support Amazon tax legislation. He pointed out that the law wouldn't work, but that it would provide "fake money to balance a fake budget."

Why is Best Buy, the Minnesota electronics retailer, trying to harm Minnesota Bloggers?

While it's possible many of the politicians supporting this legislation fail to understand how truly ineffectual it will be, the savvy business executives at Best Buy (BestBuy.com) have no excuse. They should know full well how their online competitors, like overstock.com and amazon.com, will respond to this legislation. They know exactly what affiliate marketing means. You can watch the Best Buy executives online (revisor.mn.gov, "S.F. No. 458") promoting this tax bill.

One Best Buy representative mentions that New York passed a similar bill and that Amazon is now collecting sales taxes in New York. The Best Buy executive conveniently fails to mention that Amazon is currently challenging the New York law in the Courts. She also conveniently fails to mention the many states where Amazon simply dropped its Amazon Associates.

It appears Best Buy is trying to harm Minnesota bloggers who are Amazon Associates and, thus, indirectly attack Amazon by pushing this legislation. Best Buy wants to deny Minnesota bloggers access to the Amazon Associates program. I believe Best Buy knows full well that this will be the main result of passing S.F. 458.

Knowingly harming bloggers for no true benefit other then harming the Amazon's Associates program shows Best Buy doesn't care about the collateral damage to small businesses and American citizens in pursuing legislative attacks against its competitors.

Conclusion

The redefinition of nexus, called for in Senate File 458, would, ultimately, serve no useful purpose for Minnesota. It would produce no revenue from amazon.com, who, to avoid collecting the taxes, would simply sever ties with its Minnesota affiliates. It would result in a loss of revenue from taxes formerly paid by amazon affiliates. The most successful affiliates would simply leave Minnesota and pay taxes to another state.

Wal-Mart and Best Buy are doing fine on their own. The Minnesota Legislature has no place helping them fight Amazon without benefit to the state.

As we'll see, Best Buy, Wal-Mart, and the other Big Box retailers are lobbying for federal Internet sales tax legislation. Those companies back an organization called "Stand With Main Street." This group is pushing for federal legislation to invalidate the Supreme Court's Quill decision. Doing so would allow every state to demand all online sellers collect state sales tax, even if the online seller has no physical presence in the state. I'll write about this topic separately and why I strongly oppose the so-called "Streamlined Sales Tax Project."

Note: Bainvestor.com is an Amazon Associate.